Challenges of Governing the Chinese Economy

No matter from what perspective you look at it, the people of China have gained tremendously from Deng Xiaoping’s decision to abandon the centrally planned economic governance system. Since the late 70s, some one hundred million have left absolute poverty, almost all citizens have managed to accumulate some descent wealth, while a few have become rich.

In general, the Chinese government is lauded for securing the smooth and successful transition to a market-based economy. However, the process has not been finalized. The Institute of Economics and Resource Management of Beijing Normal University estimates in its “2005 China Market Economy Development Report” that by 2003 the Chinese transition to a market economic system has only been completed to a degree of 73.8%. The European Union still refuses China the status of a market economy.

A forum co-organized by Gerakan Wanita and the Friedrich Naumann Foundation on 11 September discussed some issues of concern in this incomplete transition to a market economic system. The 78 years old renowned Chinese economist Prof. Mao Yushi reminded the audience of the stepping stones and key achievements in the development of the Chinese economy. However, he also pointed to the authoritarian political system, which creates a difficult path to democracy and negatively impacts the smooth development of the economy.

FNF Project Director Rainer Heufers also linked present flaws in China’s economic growth and development to the political system. Overheated investment by government agencies appears to periodically burden the Chinese economy. This overinvestment occurs, because the investment is partially financed by bad bank loans that misallocate given resources. The overinvestment in China is hence due to the malfunctioning financial system, and to a government decision-making that does also follow non-economic criteria. The central government keeps strategic businesses, the financial system and entire sectors of the economy in state ownership. However, it simply does not have the capacity to regulate the investment effectively. Meanwhile, it does not allow for a decentralized and truly autonomous decision-making on the local level. This goes back to the centralized governance system within the political leadership. Centralised control mechanisms, however, are rendered futile when local governments fail to implement them.

Dr. Wang Xiaolu finally presented a comparative index of the establishment of a market economic system in China’s provinces. According to this index, Shanghai has finally taken the top position among Chinese provinces. In general, the index pointed out that all the 31 provinces made progress in the transition of a market economy. Between 2003 and 2005, major achievements were made in the relations between government and markets, in the development of non-state enterprises, and in the development of commodity market. Problems were, however, stated in the development of factor markets and in the legal environment.

The forum was attended by Dato’ Seri Chia Kwang Chye, Secretary General of Parti Gerakan, and Dr. Wolf-Dieter Zumpfort, Deputy Chairman of the Friedrich Naumann Foundation.

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